Prospect of Rousseff re-election spooks Brazil markets

Brazilian markets are reeling at the prospect of a second term for President Dilma Rousseff, and experts say the selloff may not end anytime soon.

The Brazilian real dropped to six-year lows against the U.S. dollar this week, while the benchmark Bovespa index has tumbled over 5 percent since Monday.

"It won't be surprising to see more market weakness going into Sunday's polls. Rousseff must re-establish her credentials and prove that she's willing to make the necessary reforms" to support economic growth, said Vishnu Varathan, senior economist at Mizuho Bank.

"She's aware of the loss of confidence and comparisons to former leader Lula da Silva, who markets disliked," he said.

Rousseff garnered 39 percent of support in first-round voting, according to an Institute of Public Opinion and Statistics (IBOPE) poll, and 40 percent in a poll by Datafolha. Silva had 25 percent in both polls.

If one candidate does not obtain a clear majority this weekend, a runoff vote will take place on October 26.

In a simulation runoff vote by IBOPE, Rousseff led Silva 42 percent to 38 percent, while Datafolha showed Rousseff leading 49 percent to 41 percent.

Silva was appointed as the PSB's presidential candidate in August after the death of party leader Eduardo Campos. She is known for market-friendly policies, such as credible inflation targets, central bank independence, and a floating exchange rate.

A Silva administration could improve confidence indicators and take 2015 gross domestic product (GDP) growth to 1 percent, Citi economists said in a note last week. The Brazilian central bank expects the economy to grow 0.7 percent in 2014.

Silva's platform also promises a better business environment, Citi added.